Institutional Accountability and Jurisprudential Integrity in International Arbitration: Insights from the Indus Waters Treaty Case.

Indus-Waters Treaty / Pre-arbitral mechanism / Constitution of Tribunal / Treaty interpretation / VCLT

Dipen Shah / November 6, 2024 / Leave a comment

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Introduction

Arbitration is a consensual process that requires the agreement of the parties. A consensual means of dispute resolution means, unless the parties have agreed to arbitrate, there is no obligation to arbitrate and there can be no valid arbitral determination of their rights. This blog analyses the effect of mandatory pre-arbitral mechanism on the consent to arbitrate by critically analysing the Award ??on Competence of Court in Indus Waters Treaty Arbitration (Pakistan v. India), PCA Case No. 2023-01.

?India's Objection

India objected to ?the constitution of an arbitration tribunal established to resolve disputes under the Indus Waters Treaty and stated:

1. Tribunal constitution is illegal for breaching mandatory condition precedent to arbitration (Article IX (6)) requiring neutral expert determination under Article IX (5) (b) or (c) before commencing arbitration.

2. The constitution of 5-member tribunal when parties agreed to 7-member tribunal is plain breach of treaty mandate and this formation defect renders tribunal constitution in breach of treaty and illegal.

The Dispute

The dispute concerned use by India of inter-state rivers for hydroelectric power generation under design and operational constraints. Pakistan claim's that India's dam design controls the flow of river and is a breach of treaty right.

The Resolution Mechanism Of Treaty

The main treaty object in preamble required that rights and obligations between India and Pakistan regarding use of multi-state rivers should be decided in a spirit of goodwill, friendship, and cooperative spirit. A special treaty mechanism was used to achieve this aim. It included a mandatory pre-arbitral mechanism as under:

- The commission was the first point of dispute resolution encouraging consultation, dialogue, and cooperation between governments.

- On failure of commission to arrive at consensus, the treaty mandated a neutral expert to decide disputes of technical nature-like design, affecting treaty rights.

- Reference to arbitration can only be made if neutral experts decide that a dispute has arisen for determination through arbitral procedure.

- Reference to arbitration bypassing the neutral expert procedure required a separate agreement 'compromis'. (no such special agreement was executed between parties)

- Article IX (6) prohibited constitution of arbitral tribunal pending neutral expert determination.

Tribunal's Decision

Tribunal rejected India's objection. Frustration of Pakistan's desire to arbitrate the dispute, was the primary reason assigned for not waiting for the mandatory pre-arbitral mechanism to conclude. Despite an agreed bar to jurisdiction under Article IX (6) prohibiting arbitration when a neutral expert is dealing with the issue, the tribunal upheld its constitution. Tribunal rejected India's argument of an illegal tribunal constitution with a 5-member tribunal instead of 7 under the treaty stating that failure of one party to appoint arbitrator does not affect authority of tribunal. Whether the fulfilment of the pre-arbitral mechanism was a conditional consent to arbitration was not answered by the tribu. However, tribunal agreed that party consent is required for a valid constitution.

Critical Analysis of Indus-Water Tribunal's Award on Competence of Tribunal

A. Mandatory Nature of the Pre-Arbitral Mechanism?

The principle of party autonomy is central to determining the number of arbitrators. Gary Born in his Treaties on International Commercial Arbitration, 2020 ed states that party’s agreement regarding selection of the arbitrators must be given effect to and applies fully to agreements concerning the number of arbitrators

The Indus case reflects a conflict between:

(a) unilateral obstruction by party to tribunal constitution by refusing to appoint arbitrators; and

(b) Parties right to equal and proportionate representation in the tribunal formation.

(c) unilateral formation of a tribunal by one party which is at odds with the requirement of impartiality and neutrality.?

There is a fundamental distinction between obstruction to arbitration by non-appointment when arbitration is commenced in compliance with treaty obligations and the obligation to arbitrate without exhausting pre-conditions of consent to arbitrate. In the fformer,the obligation to arbitrate under a treaty is an enforceable right, in the latter the obligation to arbitrate does not exist in the absence of performance of the condition. Therefore, a tribunal's constitution in breach of party autonomy recorded in treaty is non-est.

?B. The International Law Perspective

The Vienna Convention on the Law of Treaties, 1969, in Article 31, mandates that a treaty should be interpreted in good faith by giving ordinary meaning to its terms and considering its object and purpose.

According to Article 2 of Geneva Protocol, 1923 the ?constitution of arbitral tribunal shall be governed by the will of the parties. Article (1) (c) of Convention,1927 mandates arbitral tribunal must be constituted in the manner agreed upon by the parties and in conformity with the procedure agreed. Article II (1) and Article V (1) (d) of New York Convention states that an award will not be recognised if composition of the tribunal is not in accordance with agreement of the parties. Hence, the party has the autonomy to decide the composition of the tribunal.

Gary Born in his well-known Treaties on International Commercial Arbitration, 2020 ed. said:

" ...if the dispute resolution clauses clearly provide that negotiations or other procedural steps are a mandatory obligation, arbitral tribunals have given effect to parties’ intentions" (Born 2020)

International Court of Justice (ICJ) in Georgia v. Russian Federation [2011] ICJ Rep 70 dismissed the application of Georgia before ICJ for failure to satisfy the requirement to negotiate disputes prior to seeking judicial resolution.

United States Supreme Court in BG Group plc v. Argentina and Waste Mgt Inc v. United Mexican States (ICSID Arb (AF)/98/2) held that condition precedent to arbitration agreement are the conditions concerning 'consent to arbitration'.

In Int'l Research Corp.plc v Lufthansa Sys. Asia Pac. Pte Ltd (2012) Singapore High Court held that in the absence of fulfilling condition precedent to commencement of arbitration, neither party is obliged to participate in arbitration.

The treaty did not envisage a dispute capable of reference to arbitration unless neutral expert decides that a dispute exists. In the absence of a dispute and without fulfilment of condition precedent to determine technical differences through a neutral expert appointment first, the obligation to arbitrate and the consent to arbitrate did not exist. International tribunals have consistently given effect to the text of the treaty assigning plain meaning to the words.

C. Party Autonomy and Tribunal Constitution

The Indus Waters Treaty's pre-arbitral mechanism must be viewed through the lens of the treaty's fundamental aim: fostering a spirit of cooperation between the parties. This mechanism, far from being a mere procedural formality, represents a deliberate and intentional effort to prioritise collaborative dispute resolution. The neutral expert determination only covered technical disputes such as the design of the dam and its effect on river flow. Such a determination could have assisted the judicial process of arbitration with technical knowledge of dispute. One cannot bypass a mandatory pre-arbitral mechanism by ignoring the treaty.?

The performance of precondition to determination by neutral expert and thereafter a mandatory negotiation was not a procedural requirement but a jurisdictional embargo on the arbitration mechanism. When the tribunal was hearing the matter, neutral expert was already dealing with the issue. PCA has in Louis Dreyfus Armateurs SAS v. Republic of India (PCA/2014/26) held that States are free to condition their consent to arbitration in any way they wish, and it is not for the tribunal to deem such requirements as merely precatory or allow them to be side stepped. The duty to perform treaty in good faith is the fundamental value driving international law. The mandatory character of pre-arbitral mechanism is indicated through Article IX (6) prohibiting arbitration when neutral expert is deciding. Therefore, when the contract contemplates parties to a pre-arbitral procedure of determination and negotiation with a neutral expert, the courts do enforce such obligation in the international context as flowing from international law itself.

Conclusion

Parties' agreement regarding the number of arbitrators is an aspect of party autonomy and has been implemented in the majority of arbitrations worldwide. There is a significant body of authority showing that awards from arbitrators not appointed as prescribed or appointing a single arbitrator instead of a three-person tribunal, render the tribunal invalid. (See: Cia de Navigation San Leonardo , 105 F.Supp. 452 (S.D.N.Y. 1952) (vacating award made by two arbitrators, notwithstanding arbitration agreement providing for three-person tribunal); Judgment of 13 November 2013, 32 ASA Bull. 89, 91-92 (2014) (Swiss Fed. Trib.) (appointment of sole arbitrator, instead of three-person tribunal provided for in parties’ agreement, would be grounds for annulment, but award-debtor waived objections); Judgment of 11 August 2017.)

The disregard for treaty-mandated pre-arbitral procedures and the improper constitution of the tribunal in the Indus Waters case raises serious concerns about the integrity of the arbitration process. This situation prompts a critical question: should arbitral institutions assume a more proactive role in safeguarding consistent and reliable jurisprudence through enhanced oversight mechanisms?

Dipen Shah

Senior Practising Advocate & Arbitration Counsel

Solicitor England & Wales, India

Master of Laws - International Law and Treaty Law

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